Citizens' Bottom Line Hit By Higher Costs: Should You Sell?
Zacks Investment Research | Aug 18, 2019 09:25PM ET
Citizens Financial Group’s (NYSE:CFG) bottom line is affected by rising cost base and unimpressive fee income growth story. Also, pending legal issues remain a concern. However, the company currently displays solid top-line growth and a strong capital position. Also, rising loan and deposit balances act as a tailwind.
The company has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average of 3.6%
The Providence, RI-based company’s fee income fails to support top-line growth. Therefore, reduced mortgage banking fees — on account of negative impact of lower rates on mortgage servicing rights valuations and a reduction in capital market fees — might limit its benefits from expansion initiatives in the quarters ahead.
Cost escalation is another downside for Citizens Financial. The company’s non-interest expenses have witnessed a CAGR of 3.9% over the last three years (2016-2018). Costs are likely to remain elevated due to the company’s investments in newer technologies and focus on building fee income capabilities organically.
It remains exposed to several pending legal hassles that are likely to keep legal costs high going forward. Also, significant exposure to commercial loans keeps us apprehensive.
However, the company remains committed in revamping profitability through ‘Tapping Our Potential’ (“TOP”) efficiency initiatives, which aim at enhancing revenues and efficiency. In July 2019, it introduced the TOP 6 Program, which is expected to achieve a pre-tax benefit of $300-$325 million by the end of 2021.
Notably, Citizens’s capital deployment activities are impressive. It has a share repurchase program of up to $1.28 million underway. Markedly, the company raised the common stock dividend by 12.5% in July 2019. On the back of its favorable debt/equity and dividend payout ratios compared with the industry, we expect these activities to be sustainable.
Notably, the company has been able to gain analysts’ confidence over the past 30 days. Its earnings estimates for the current year have been revised slightly upward to $3.82 over the past month.
Shares of Citizens Financial have lost 14% over the past six months compared with the Zacks Investment Research
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